Appendix 1: Correspondence
from Rt Hon David Lidington
Letter from Rt Hon David Lidington,
Minister of State for Europe, 30 April 2014
EVIDENCE SESSION ON THE EU AND INTERNATIONAL
ISSUES RAISED BY THE SCOTLAND REFERENDUM: FOLLOW UP
Thank you for the opportunity to appear
before your Committee to outline the FCO's paper on the EU and
international issues raised by the referendum on Scottish independence.
Your Committee has taken on an important role in relation to this
subject, and I am sure you will continue to make an influential
contribution to the debate as we approach the vote in September.
I promised to write on the financial
impact of independence on aspects of the Scottish economy and
the ability of an independent Scotland to maintain the opt-outs
and derogations currently enjoyed by the UK.
EU Budget
On the financial impact of independence,
you asked for clarity on the losses to Scottish agriculture that
could occur if there were to be a gap between leaving the UK and
joining the EU. In the short term, if an independent Scottish
state did not become a Member State immediately after becoming
independent of the UK, then CAP receipts would be interrupted.
Any continuation of existing levels of support to farmers would
require funding from a Scottish national budget; somewhere between
550 million and 600 million per year (2011 prices),
depending on the year in question. These numbers reflect the level
of UK CAP receipts allocated to Scotland for the period 2014-2020,
which has been set at 3.6 billion for Pillar 1 receipts.
You also asked for more detail on how
certain figures were arrived at. I thought it would be most helpful
to explain the various elements that are factored in to the Government's
analysis.
The accession date for an independent
Scottish state is uncertain. So, to illustrate the effect of independence
from an EU budget perspective, the impacts have been analysed
over the course of 2014-20. If Scotland's share of North Sea oil
revenue is determined on a geographical basis, and assuming that
an independent Scottish state was a member of the EU from 2014,
the analysis presented in the FCO's January 2014 paper gives the
following results.
The rebate: Without a budgetary correction,
there would be a total additional direct cost to Scottish taxpayers
of around 2.9 billion (1,100 per household). This
figure consists of the loss of the benefit from the UK rebate
(2.3 billion), with the rest (about 640 million) arising
from the Scottish contribution to the UK rebate.
Receipts -
uncertainties around the CAP: An independent Scottish state's
receipts from the EU budget are uncertain and would depend on
the terms of accession, which would have to be agreed by all 28
Member States. In particular, it is unclear whether CAP receipts
would transit from current levels to 196 per hectare by
2020, or whether, in common with all 13 Member States that have
joined the EU since 2004, full treatment in respect of CAP receipts
would be phased in over ten years. The analysis therefore presents
CAP receipts, total receipts and net contributions for an independent
Scottish state as a range of numbers, reflecting both of these
scenarios, and all possibilities in between, which might potentially
be negotiated. Following the decision to allocate Scotland 3.6
billion in CAP Pillar 1 receipts for 2014-20, an independent Scottish
state's CAP Pillar 1 receipts could range from around 1.2
billion less to around 950 million higher over 2014-20.
Net contributions: However, the total
impact of different levels of receipts is dwarfed by the impact
of losing the benefit of the UK rebate. In short, even under the
most optimistic scenario for CAP receipts, an independent Scottish
state's net contribution would be around 2.2 billion (840
per household) worse than it would be if Scotland were to remain
part of the UK. Under less optimistic scenarios, an independent
Scottish state could see its CAP (and total) receipts fall substantially,
with the deterioration in net contributions over 2014-20 rising
to as much as 4.3 billion (1,650 per household) compared
with the situation if Scotland were to remain part of the UK.
All of these euro figures are expressed
in terms of 2011 prices. So, as noted above, under the most
optimistic scenario for CAP receipts, an independent Scottish
state's net contribution would be around 840 (2011 prices)
worse per household than it would be if Scotland were to remain
as part of the EU. The Chief Secretary noted at the launch of
the paper in January that this would be around £750 (this
figure is expressed in 2014 prices). Under the worst case scenario
in respect of CAP receipts, the additional net cost per Scottish
household would be almost double that.
Derogations and Opt-Outs
We discussed the question of specific
opt-outs. I confirmed that the UK government would have no problem,
in principle, with an independent Scotland attempting to negotiate
opt-outs and derogations.
However, I also indicated that all other
Member States would have to agree to allow such variable geometry
in Scotland's case.
As promised to your committee, the list
of opt-outs and derogations that are written into the treaties
and protocols is as follows:
· Protocol 15: The single
currency opt-out. This recognises that the UK is under no Treaty
obligation to adopt the single currency and that a separate decision
to do so would be required by the UK government and parliament.
This protocol also establishes procedures to enable the UK to
opt in to the single currency.
· Protocol 19: The Schengen
opt-out. This provides for the UK (and Irish) opt-out from elements
of Schengen, and provides for the UK (and Irish) opt-in to some
parts of the Schengen acquis, or measures building on these parts,
on a case-by-case basis and by unanimity.
· Protocol 20: The opt-out
from the prohibition of internal border controls. This authorises
the UK to maintain border controls on persons seeking to enter
the UK from other Member States. The protocol allows the UK and
Ireland to maintain the Common Travel Area. It also allows other
Member States to impose equivalent border controls on persons
entering their territories from the UK and Ireland.
· Protocol 21: The JHA
opt-in. This protocol provides for the UK's (and Ireland's) non-participation
in justice and home affairs measures and establishes procedures
to enable the UK (and Ireland) to opt in to those measures in
which it does wish to participate, either during negotiation or
after the adoption of those measures.
· Protocol 36: The JHA
opt-out. This protocol sets out transitional provisions for third-pillar
justice and home affairs measures adopted prior to the Lisbon
Treaty, making these measures subject to CJEU jurisdiction and
Commission infraction powers. The protocol allows the UK to opt
out from these measures en masse.
There are also a number of derogations
from customs and excise rules, most noticeably on VAT. You asked
for more information on VAT derogations enjoyed by the UK, and
on whether newly acceding Member States have been able to obtain
similar conditions.
Zero rates of VAT for items such as
food and children's clothing apply to Scotland as part of the
UK. These zero rates are specific to the UK and are maintained
under long-standing EU agreements - they are not available to
all Member States under the VAT Directive. Whether an independent
Scotland would be able to secure similar derogations from the
VAT Directive, which stipulates a minimum reduced rate of VAT
of 5% for certain products and services, and a minimum standard
rate of 15% elsewhere, would be a matter for negotiation between
the government of an independent Scotland, and the EU and its
Member States. An independent Scotland would also need to secure
a derogation to continue with the existing reduced rate of VAT
for domestic fuel and power.
Some Member States that have recently
acceded to the EU, such as Malta, have secured zero rates of VAT
for certain items, such as food. In terms of the Member States
which have joined since 2004, none has secured zero rates on as
wide a range of goods and services as the UK. Further details
on VAT rates and special conditions applied in the EU can be accessed
at:
http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf.
As I made clear in the evidence session,
derogations may also be written into pieces of EU legislation.
An example of such a derogation appears in the Working Time Directive
- any Member State may opt out from the 48-hour per week limit.
The UK has done this.
Further points
I would like to clarify the timescales
involved in Croatian accession. I stated in the evidence session
that the Croatian accession negotiations lasted around six years.
This refers only to the period between October 2005 and June 2011
during which screening and negotiations on accession chapters
took place. The wider accession process takes significantly longer;
eight years passed between the opening of negotiations to the
moment of accession, while the entire process, from the point
of Croatia submitting its application to the moment of accession,
took ten years.
During the evidence session I stated
that a separate EU Member State would require a financial regulatory
authority and a central bank of its own. Although a financial
regulatory authority is required, a central bank of its own is
not. Additionally, I indicated that the Scottish contribution
to the UK rebate would be around £1.9 billion over the period
from 2014-2020. I would like to clarify that this figure in fact
refers to the additional net contribution to the entire EU budget
that an independent Scotland would have to make compared to its
net contribution as part of the UK over the same period. As stated
above, the Scottish contribution to the UK rebate is estimated
at around 640 million over the period 2014-2020.
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